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Johannesburg - Bank of America Merrill Lynch is out on a limb with its call to buy South African dollar bonds.
Finance Minister Nhlanhla Nene has shown resolve to get his fiscal house in order, averting the threat of a credit downgrade, BofA economist Vadim Khramov said in a note this month recommending an overweight position in the nation’s external debt. Investors including Aberdeen Asset Management, Investec Asset Management and Acadian Asset Management aren’t convinced.
Dollar bonds of Africa’s most-industrialised economy have returned 1.2% this year, beating the 1% average for emerging-market nations. The premium investors demand to hold South Africa’s foreign-currency debt rather than US Treasuries fell 28 basis points from a 13-month high in March, according to JPMorgan Chase indexes.
“South Africa remains the most attractive credit” among emerging-market peers in Africa, the Middle East and Europe, Khramov said by phone from London on July 13. “We expect the government’s fiscal stance to improve, and we consider rating downgrades unlikely this year.”
‘Better places’
Nene has committed to keeping public spending under control, with the budget deficit forecast to drop to 2.5% of gross domestic product by the year ending March 2018 from 3.5%, even with economic growth stifled by power cuts and a slump in commodity prices.
Fitch Ratings and Standard & Poor’s affirmed the investment-level sovereign rating last month, citing fiscal plans, while Moody’s Investors Service has said there is little chance of a downgrade that could prompt some investors to sell the nation’s debt.
While Nene’s fiscal-consolidation goals are clear and positive, “implementation is always key,” especially in a low- growth economy such as South Africa, said Edwin Gutierrez, the London-based head of emerging market sovereign debt at Aberdeen, which is underweight South Africa and favours Russian and Turkish debt.
“There are better places with better risk-return both in the region and outside of the region,” Gutierrez said by phone on July 13. “You do get higher nominal GDP growth in Turkey and Russia, so that’s helped the debt dynamics to improve.”
Yields on South Africa’s $2bn of 5.875% notes due September 2025 have dropped 10 basis points from a five- month high on June 10. The yield was little changed at 4.53% by 15:30 in London on Thursday, compared with 4.68% for similar-maturity Turkish debt and 5.05% for Russian securities.
